Opinion

Pension crisis

Peter Benedek was a pensions activist long before Nortel Networks went bankrupt in January. Through his

RetirementAction.comwebsite and through submissions to various pensions panels, he was seeking to reform a system in crisis. Now, the crisis has landed on the very doorstep of this engineer who retired years ago from Nortel's Bell Northern Research division, as he and thousands of other retirees seek to fight for their rightful share of "what remains of Nortel's carcass." Benedek, on the phone from his Ottawa home this week, says the fight for reform is not just about the Nortel mess. But it seems to me that the Nortel bankruptcy underscores much of what is rotten about the country's private pensions system.

As he himself says, the country's private pensions are in "systemic failure" due to chronic underfunding, poor oversight and government inaction, among other problems.

For instance, Nortel's Canadian pensioners and pensioners-to-be discovered that the trust holding their pension money was only 69% funded. Meantime, in the Canadian bankruptcy proceedings, they are classified as unsecured creditors together with junk-bond holders when it comes to access to Nortel's assets, which they have discovered are very few in this country.

"It's totally bizarre how a company with headquarters in Canada ended up with all its cash in the U.K., U.S. and elsewhere," Benedek says. "The [Canadian] court can't do much, it seems."

The only place something can be done is back at the government level, a place where nothing has been done so far about Nortel and really very little about pensions in general.

Benedek cites the $10-billion bailout of General Motors in Canada, including $3-billion to top up the company's pension fund, as what can be done if governments want to act. But Nortel's bizarre, sorry story has not attracted the same level of sheer political expediency.

If governments had the political and moral will to act, Benedek and his activist colleagues have some suggestions about legislative changes to ease the impact of the private pensions crisis and enable pension reform. A space such as this cannot deal with the complexities of the pension landscape, but here are some basic problems and how they might be solved: - There is no protection for pension plan underfunding in sponsor bankruptcy, in which voluntary bondholders are compensated for risk while pensioners were forced into plans. Benedek suggests the Bankruptcy and Insolvency Act be modified to provide priority for pension plan underfunding and other employee claims. After all, pensions are really deferred wages. - Pension adjustment prevented and/or reduced pension contributions. In sponsor bankruptcy and plan underfunding, pension adjustment reversal is no relief because pensioners are older and unlikely to get jobs so they can contribute to an RRSP. Benedek says a refundable carryback "tax credit" could be provided for those no longer working. - The U.S. and U.K. governments assumed control of Nortel plan to battle against Canadian pensioners' interests in provincial court. Needed are intergovernmental negotiations and interference in asset sales and repatriation to protect Canadian pensioners' claims. - There is little or no pension benefit guarantee, as there is in the United States and U.K. Pension benefit guarantees should be introduced for the first $55,000 of pension and Ontario's guarantee of $1,000 a month should be honoured. - On bankruptcy-driven pension plan windups, pensioners are forced to annuitize while employees and non-pensioners are allowed commuted value. The windup should be slowed and pensioners should be allowed the commuted value option and permitted to transfer 100% of the pension value into an RRSP invested into a low-cost professionally managed asset pool. - Finally, with the private pension system failing systemically, radical reform is needed now. A new pension system model involving default enrolment, pooled investment management and longevity insurance, now available in the United States, should be introduced.

Benedek knows these are tall orders. But they would go a very long way toward fixing the mess that private pension plans are in now and they would go a long way to making sure future private pensioners avoid the same fate.

"It's too late to keep Nortel going," he says. "It's not too late to make the pensioners whole."

It's also never too late to make the point that planning for retirement must begin early and must begin at home with the individual saver/investor.

Yes, Old Age Security and the Canada Pension Plan may one day be supplemented with a voluntary government-sponsored plan. But the individual must not count on any such programs to fund most of his or her retirement, and that includes private company pension plans, as Nortel pensioners are discovering.

"No one ever suspected that a trust fund would not pay out what it promised," Benedek says of Nortel's windup.

I suspect, as does Peter Benedek, that there will be other shoes to drop with Nortel and its pensioners, and that there will be plenty of others dropping as the private pensions crisis deepens.